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Will High Prime Member Churn Hurt Amazon Sales?

Amazon.com ‘s ( AMZN ) Prime loyalty program is one of the keys to the company’s e-tail dominance, but the secretive Amazon reveals little about Prime’s underlying metrics, leaving analysts to generate their own. According to a recent analysis conducted by ITG Investment Research, Amazon’s churn rate — the annual rate at which shoppers stop subscribing to Prime — was 32% in Dec. of 2015, which ITG analyst Steve Weinstein called “high.” But in a research note Thursday, Weinstein wrote that even though the company has a high churn rate, customers who dropped Prime actually spent 8% more money on Amazon.com in the year following the cancellation. Amazon Prime is one of the few extremely successful loyalty programs in e-tail, a fact that surprises Wells Fargo analyst Matt Nemer. He told IBD recently that he would have expected competitors to innovate, but few have done so with success. Competitor Wal-Mart ‘s ( WMT ) Walmart.com does not have a customer loyalty program for online sales. Target ( TGT ) recently rolled out its Red Card program, which offers free shipping from Target.com, an extra 30 days for returns and 5% off all purchases. Amazon Prime affords its members free one-day shipping in certain markets, free two-day shipping in most of the continental United States, free streaming video with original award-winning content, and a host of other perks. It’s no wonder that Amazon CEO Jeff Bezos is betting big on Prime: Member spending continues to drive Amazon’s sales, too. In Q4 2015, Weinstein says that Prime members generated 57% of Amazon’s North American top line and that Prime members increase their spending about 12% annually. Older Prime members tend to spend more, and Weinstein’s analysis indicated that those members who signed up in Jan. of 2012 spent, on average, nearly 45% more on Amazon in 2015 than Prime members who joined in Jan. 2014. Non-Prime shoppers spend less than $1,000 on average in 2015. Some 33% of Prime’s 46 million members have been acquired in the last two years, Weinstein says. Amazon stock rose 2.5% to 534.10 in the stock market today . The company has an IBD Composite Rating of 75, where 99 is the highest. Seattle-based Amazon posted mixed Q4 earnings — despite hauling in more than $100 billion in sales during 2015, the company missed Wall Street’s lofty earnings target. According to Nemer, Amazon captured 51% of all U.S. retail growth in Q4. He also said that the sell-off following the earnings release was too hasty and that the company continues to have strong fundamentals and a dominant position in the market.

Is Amazon Changing Diapers Focus To Selling Its Own Brand?

E-tail juggernaut Amazon.com ( AMZN ) might be getting serious about selling its own brand of diapers. Amazon is asking some of its customers via an emailed market research survey about the design and packaging of a new diaper brand called Mama Bear, tech news webside Re/code first reported . The survey asked about the potential new brand’s trustworthiness and whether shoppers would buy such products, if they were offered at a “reasonable price,” among other questions, said Re/code. Amazon.com stock rose 2.8%, to 521.10, on the stock market today , more than 25% below its all-time high of 696 touched in late December, before the stock markets tumbled on global economic worries and falling oil prices. Re/code pointed out Amazon’s survey could be on behalf of another brand. The company doesn’t comment on rumor or speculation, an Amazon spokeswoman told IBD via email. The diaper business is worth more than $29 billion, according to research firm Nielsen, which suggests that the product category could be an important one for large retailers such as Wal-Mart ( WMT ) and Amazon.com. Diapers are also ordered frequently, which is shopping behavior that e-tailers such as Amazon like since it affords them a chance to upsell the shopper on other offerings as well as track buying behavior. Amazon had previously launched — and then killed — a program to sell its own brand of diapers, though the company does own Diapers.com, which it purchased for $545 million in 2010 . Former Diapers.com executive Marc Lore has gone on to found Jet.com, an e-tail startup that aims to take on Amazon. When asked how to beat Amazon at diapers, Cathy Halligan, former chief marketing officer for walmart.com, told IBD in 2010 that the solution involved “developing those capabilities themselves. “What I believe is a possibility is that with larger companies’ purchasing power, there might be an advantage in product costs, opportunities through procurement, because a company like Target ( TGT ) or Wal-Mart has larger-volume buys than” others, she said. “They can leverage their larger scale to lower product costs.”

Is Amazon Ocean Shipping Worth Millions In Free Cash Flow?

With annual ocean shipping hauling in $350 billion a year in revenue, there is good reason why Amazon.com ( AMZN ) is interested in the business. E-commerce leader Amazon is planning to launch a global shipping and logistics operation that will compete directly with UPS ( UPS ) and FedEx ( FDX ), Bloomberg reported Tuesday, saying it had reviewed documents for the plan, called “Dragon Boat.” Bloomberg wrote that the new operations would expand Fulfillment By Amazon (FBA), which provides storage, packing and shipment of goods from third-party sellers. Such sellers make up a significant portion of its e-tail growth. An ocean shipping business alone could generate substantial returns — more than $100 million in free cash flow, Flexport CEO Ryan Petersen told IBD. That’s assuming the goods would be ingested into FBA’s supply chain — which aims to eventually squeeze out the middlemen, paperwork and headaches from logistics and delivery. The cost savings Amazon expects to see by owning the supply chain end to end, and the charges it could levy third-party sellers (or other merchants) would generate that free cash flow, generally defined as cash generated by operations minus capital expenditures. “It’s attractive for Chinese merchants to get into Fulfillment By Amazon centers right now,” Petersen told IBD. “Even with my conservative model, which would not make Amazon a large freight forwarder (though) less than a fraction of 1% of the overall ocean shipping business, it could easily earn more than $100 million in free cash flow.” Peterson says Amazon’s 90 or so fulfillment centers in the U.S. would easily be able to handle 450 containers every week. (The number of fulfillment centers is from Flexport’s data, Amazon does not disclose that). Based on current shipping costs, that would easily net Amazon $100 million in free cash flow, Petersen says. His estimate also assumes ocean shipping prices dig themselves out of the current slump. Rates are about half of what Petersen expects in the long run. San Francisco-based Flexport provides software and expertise that simplifies the international shipping process. Alibaba, Amazon Competition Grows The Bloomberg story said Amazon’s Dragon Boat program also will pit against its Chinese counterpart Alibaba ( BABA ) to gain share of cross-border e-commerce, which is expected to grow to $2 trillion by 2020. The world’s largest retailer , Wal-Mart ( WMT ), already does something similar when it takes possession of freight in China. But Wal-Mart doesn’t re-sell the freight shipping service, and Amazon might, according to analysts. Wal-Mart did not return requests for comment. Southington, Conn.-based Ocean Audit founder Steve Ferreira agrees with Petersen that ocean shipping could be lucrative for Amazon, and he says the company could well disrupt the shipping market. Ocean Audit specializes in detecting errors in ocean freight billing errors. The fact that Amazon last August filed initial paperwork for what might be the Chinese-side of Amazon’s ocean shipping division, Ferreira told IBD, suggests to him that the company is far along in developing its shipping operations. Amazon Would Be ‘Game Changer’ Ferreira calls Amazon’s potential entry into the ocean freight business a “stunning game changer.” He says the Seattle-based e-commerce firm could “theoretically enter the market and start moving goods at below the current market cost.” Amazon might well be gearing up to do just that. Ferreira says he believes Cong Pan , a Beijing-based Amazon attorney, is getting all the “paperwork” for Amazon Ocean set up. He says Beijing-based Amazon Vice President Brian Xue would run the ocean freight operation. Amazon did not return requests for comment. Amazon CEO Jeff Bezos has often repeated his mantra of putting customers before profits. Additional free cash flow could be used to lower the cost of Amazon’s goods or begin to offer essentially free parcel shipping for shoppers willing to wait, says Peterson. “If I had to read the mind of Jeff Bezos, he might not go after the free cash flow,” Petersen said. Baird analyst Colin Sebastian agrees with Petersen’s assessment. “I would caution that Amazon likes to use projects and other things to subsidize its core business,” Sebastian told IBD. “Amazon might not see any free cash flow because it would be absorbed into other businesses.” Sebastian says he expects Amazon will move in stages into the transportation and logistics sector. “Amazon takes an incremental approach to new businesses, and they’re not going to create a competitor to DHL right away,” he said. But Sebastian says he sess enormous potential. “There’s a lot of potential disruption,” he said, “if Amazon plays its cards right.”